August 2021

“Bad ages to live through are good ages to learn from.” 

Eugen Weber 

As some readers will recall, the ‘70s would have fit Mr Weber’s categorization, albeit with great music and films.  The combination of geopolitical and political turmoil and runaway inflation certainly left their marks on economies and financial markets alike.  While fuel and other commodities soared, bonds swooned as official rates moved into the ‘teens, and equity prices generally rose in nominal terms, but with severe bear market corrections along the way.  However, in real terms it took fully 23 years for the SPX to get back to its previous highs of late 1968.  Lessons were certainly learned, at least with respect to money supply, and the adjustment was painful as a long period of stagflation was finally broken with one of the deepest recessions on record in the early ‘80s.  There is much discussion about the similarities emerging in the current environment, notably following the geopolitical turbulence in August, and while we may not get a full repeat of the ‘70s, it seems certain that inflation will be less transitory than central bankers are letting on, especially if further trillions of fiscal stimulus get added.  Have the lessons been forgotten?

Considering everything that was going on in Afghanistan the markets took it in stride.  After a mid-month wobble equities regained their composure and the SPX closed 2.9% higher while European broad markets rallied 1.8%.  Government bond yields drifted higher while overall volatility remained subdued in light volumes.  Momentum remained firm in the European financial sector as Q2 reporting continued to show constructive results while news away from results was quite light.  In Italy talks are ongoing in the Monte Paschi resolution saga, with creative minds working overtime to come up with a “made in Italy” solution that satisfies all conditions.  By now readers are well familiar with the long-running opera buffa surrounding the world’s oldest bank (also Europe’s weakest) and it will take all the guile of Cesare Borgia himself to work this out.  More worrisome for the large investment banks were signs that the bumper conditions of the first half of the year were abating and that questions will certainly be asked at Q3 results.

Against that backdrop the Fund’s A shares returned 1.3% with credit contributing two thirds and equities one third of the performance after we increased our exposure in the later, and as stocks continued to recover from their July correction. As we look forward to September and then the run into year-end, we are still expecting to use market strength to reduce our long exposure while retaining flexibility with the portfolio.  We remain very mindful of stretched valuations in the broader risk markets but also conscious that central banks will continue to let economies “run hot” with respect to inflation, and therefore current conditions can persist.